Project Pages

Risks and Uncertainties Disclosures

Project Description: The primary objectives of this practice-issue project are to identify potential risks and uncertainties in the state and local government environment and to consider developing disclosure requirements associated with those risks and uncertainties.

Status:
Initial Deliberations  

Risks and Uncertainties Disclosures—Project Plan


Background: General disclosure guidance in FASB Accounting Standards Codification® (ASC) Topic 275, Risks and Uncertainties, requires a nongovernmental entity to disclose risks and uncertainties relating to the nature of its operations, its estimates, and vulnerability due to certain concentrations. (Topic 275 primarily is derived from AICPA Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties, which was issued in 1994.) For some governmental entities, the long-term impacts of the COVID-19 pandemic might be felt across each of those categories. However, the potential need for this information by users of financial statements extends beyond the effects of the pandemic.

The three broad categories of disclosure requirements in FASB Topic 275 are relevant to government. However, because of the differences between the public and private sectors, each category needs to be carefully considered in the context of the government environment. For example, seldom are governments exactly alike in the services that are provided to their stakeholders. The types of services provided introduce a different financial risk profile for each government. Therefore, information on the nature of operations is relevant to users of financial statements.

Due to the nature of the types of arrangements that have been addressed in recent standards (for example, pensions, other postemployment benefits, asset retirement obligations, and leases), the use of estimates has become even more prevalent in preparation of government financial statements. Regarding potential disclosures associated with the use of estimates, some governments currently provide the type of disclosure currently provided for in the private sector; however, other governments do not, which results in financial reporting inconsistencies. Disclosure requirements regarding changes in estimates are being considered in the project on Prior-Period Adjustments, Accounting Changes, and Error Corrections. Therefore, user outreach efforts will be coordinated to avoid unnecessary duplication and to ensure that user needs are being met with essential information.

As demand for government services increase while resources are being constrained, the disclosure of existing concentrations that make the entity vulnerable to the risk of a near-term severe impact on resources is relevant to financial statement users. The events that could cause the severe impact will occur in the near term may be considered essential information for governmental financial statement users. However, outreach with those users is critical to determining what information is essential. In the governmental environment, an entity may have a concentration related to a nonexchange funding source from another government (for example, a school district may obtain a significant portion of its annual revenue from a state). A government could have a concentration related to an exchange funding source (for example, a public power utility may obtain a significant portion of its revenue from the provision of electricity to a single customer or a small group of customers).

Accounting and Financial Reporting Issues. The following issues would be considered:
  • Categories of risks and uncertainties (for example, operations, estimates, and concentrations)
  • Specific disclosure requirements within each category
  • Thresholds associated with risk and uncertainty disclosures.
Project History:
  • Added to the current technical agenda: July 2020
  • Consultative group appointed? No
  • Deliberations began: September 2020
Current Developments. The Board discussed descriptions and related limitations for each of four potential disclosure category at its February 1, 2021 meeting. The project staff conducted interviews with users regarding the usefulness of those potential categories in March and April 2021.

Work Plan:
 

Board Meetings

Topics to Be Considered

May 2021: Summary of results of the user interviews.
June/July 2021: Review of potential risks and uncertainties disclosures based on user feedback.
August 2021: General disclosure issues.
September 2021: Review draft of illustrations.
November 2021: Review first draft of a standards section of an exposure draft of a proposed Statement; cost-benefit considerations.
December 2021: Review preballot draft of an Exposure Draft of a proposed Statement.
January 2022: Review ballot draft of an Exposure Draft of a proposed Statement and consider for approval.
February–April 2022: Comment Period.
May–October 2022: Redeliberations.
November 2022: Review preballot draft of a final Statement.
January 2023: Review ballot draft of a final Statement and consider for approval.
 

Risks and Uncertainties Disclosures—Recent Minutes


Minutes of Videoconference Meetings, February 1, 2021
 
The Board continued deliberations on the Risks and Uncertainties Disclosures project by discussing the descriptive components of the two approaches (uncertainty approach and risk approach) to the potential category of significant estimates.
 
For the uncertainty approach, the Board tentatively decided to seek user feedback on the proposal that this category be described as an uncertainty based on certain inputs for estimated amounts recognized in the financial statements or disclosed in the notes to financial statements. The Board then discussed the circumstances in which a disclosure for an uncertainty would be made. The Board tentatively decided to seek user feedback on the proposal that a disclosure for an uncertainty would be made if information becomes known by the management of the government about inputs to the estimate (that is, an actual event or condition has occurred that will change the inputs) before the financial statements are issued and, based on that information, it is more likely than not that the estimate will change within 12 months of the financial statement date or shortly thereafter (for example, within an additional 3 months) and the change in estimate as reflected in the relevant assets, liabilities, inflows, outflows, or other disclosures would be significant.
 
The Board then considered the descriptive components of the risk approach to the potential category of significant estimates. The Board tentatively decided to seek user feedback on the proposal that this category be described as a risk to a government based on certain inputs for estimated amounts recognized in the financial statements or disclosed in the notes to financial statements. The Board then discussed the circumstances in which a disclosure for a risk would be made. The Board tentatively decided to seek user feedback on the proposal that a disclosure for a risk would be made if information becomes known by the management of the government about inputs to the estimate (that is, an actual event or condition has occurred that will change the inputs) before the financial statements are issued and, based on that information, it is reasonably possible that the estimate will change within 12 months of the financial statement date or shortly thereafter (for example, within an additional 3 months) and the change will have a substantial impact within 2 to 3 years from the date of the financial statements.
 
The Board considered at what level of a government’s reporting entity an uncertainty or risk related to the potential category of significant estimates should be disclosed. The Board tentatively decided to seek user feedback on the proposal that the disclosure of an uncertainty or risk related to the potential category of significant estimates under both approaches would be at the level of the primary government, unless the effect of the uncertainty or risk is substantially different for a reporting unit(s) and, therefore, should be disclosed at the reporting unit level.
 
The Board also discussed the examples to be developed for the proposed guidance on disclosures for the uncertainty or risk approach related to the potential category of significant estimates. The Board tentatively decided to seek user feedback on the proposal that risks and uncertainties that meet the description of these two approaches be disclosed with clarification provided through the use of specific examples to include (1) cost of municipal landfill closure and postclosure care, (2) uncollectible amount of accounts receivable, (3) loss contingency associated with a lawsuit, (4) contingent liability associated with an obligation of another entity, and (5) asset retirement obligation associated with contamination.
 
The Board then deliberated the criterion of substantial impact for the risk-based categories, including the risk approach, and tentatively decided to seek user feedback on the proposal that for the categories of current vulnerabilities due to concentrations and government environment a substantial impact be described as one that affects the government’s ability to (1) continue to provide services at the level of the current reporting period or (2) meet its obligations as they come due.
 
The Board continued by considering the objective of disclosures for the uncertainty approach to the potential category of significant estimates. The Board tentatively decided to seek user feedback on whether the objective of disclosures for the uncertainty approach should be to provide essential information to users of government financial reports about an elevated level of variability in a particular recognized or disclosed estimated amount.
 
Lastly, the Board discussed the objective of disclosures for the risk approach to the potential category of significant estimates. The Board tentatively decided to seek user feedback on whether the objective of disclosures for the risk approach should be to provide essential information to users of government financial reports about risks faced by those governments that may impact the government’s ability to continue to provide services or meet its obligations as they come due. 

Minutes of Videoconference Meetings, January 1214, 2021
 
The Board continued deliberations on the Risks and Uncertainties Disclosures project by discussing general descriptions for the categories of current vulnerabilities due to certain concentrations and the government environment, as well as for the potential category of significant estimates.
 
Next, for the category of current vulnerabilities due to concentrations, the Board tentatively decided to seek user feedback on the proposal that risks that meet the description of this category and the limitation thresholds be disclosed with clarification provided through the use of specific examples of potential concentration risks. These examples will tentatively include (1) principal employers; (2) principal industries; (3) principal resource providers; (4) composition of principal resources; (5) labor (such as collective bargaining arrangements or percent of unionized workforce); and (6) external suppliers of material, labor, or services (for example, incarceration facilities with third-party staffing.) With respect to the category of government environment, the Board tentatively decided to seek user feedback on the proposal that all risks that meet the description of the category and the limitation thresholds be disclosed with clarification provided through the use of specific examples, including (a) restrictions on raising revenue, (b) expense restrictions (such as debt covenants), (c) inflexibility in reducing expenses (such as unfunded mandates), and (d) limits on incurrence of debt that are externally imposed.
 
The Board then discussed the potential category of significant estimates and tentatively decided to seek user feedback on alternative descriptions of that potential category. Those alternatives will be further refined at the February Board videoconference.
 
The Board also discussed disclosure objectives related to the categories of current vulnerabilities due to certain concentrations and the government environment. The Board tentatively agreed to seek user feedback on the objective of the proposed disclosures developed for those categories: to provide essential information to users of government financial reports about risks and uncertainties faced by those governments that may impact the government’s ability to continue to provide services and meet its obligations as they come due. Whether the estimates category will be addressed in the objective will be discussed at a future meeting after feedback is received as part of the additional user outreach effort.

Minutes of Videoconference Meetings, December 13, 2020
 
The Board began the deliberations of the Risks and Uncertainties Disclosures project by discussing the scope of the project. The Board tentatively decided that the scope of the project should be limited to certain categories of risks and uncertainties disclosures. The Board then discussed whether disclosures related to the category of current vulnerabilities due to certain concentrations should be included in the scope of the project. The Board tentatively decided that disclosures related to a government’s current vulnerabilities due to certain concentrations should be included in the scope of the project. The Board continued the discussion by considering whether disclosures for risks and uncertainties related to the category of significant estimates should be included in the scope of the project and tentatively decided that project staff should conduct additional user outreach in the area of significant estimates before a determination of whether this topic should be included in the scope of the project is made. Next, the Board discussed whether disclosures for risks and uncertainties related to the category of the government environment should be included in the scope of the project. The Board tentatively decided that disclosures related to the government environment should be included in the scope of the project.
 
The Board continued deliberations by considering the appropriate level of detailed requirements to develop for the proposed note disclosures related to the categories in the scope of the project. The Board tentatively decided to develop risks and uncertainties disclosure requirements within the described categories and to accompany the proposed requirements with examples.
 
The Board discussed various limitations to be considered by governments in their determination of which risks and uncertainties to disclose for the categories in the scope of the project. The Board tentatively decided to propose that for the categories of current vulnerabilities due to certain concentrations and the government environment, disclosures be required when the government determines that it is “reasonably possible” that an event associated with the risk or uncertainty will occur 12 months beyond the financial statement date or shortly thereafter (3 months) and that event will have a “substantial impact” within 2 to 3 years of the date of the financial statements.
 
Next, the Board considered at what level of a government’s reporting entity risks and uncertainties in the scope of the project should be disclosed. The Board tentatively decided that proposed disclosures for risks and uncertainties in the categories of current vulnerabilities due to certain concentrations and the government environment should be presented for the primary government, including its blended component units, unless the risk profile is substantially different for a reporting unit(s) and, therefore, should be disclosed at the reporting unit level.
 
The Board also discussed the examples to be developed for the proposed guidance on disclosures related to current vulnerabilities due to certain concentrations. The Board tentatively decided to include (a) principal employers; (b) principal resource providers; (c) labor; (d) external suppliers of material, labor, or services; and (e) principal industries as proposed examples. Lastly, the Board discussed examples to be developed related to proposed disclosures for risks and uncertainties related to the government environment. The Board tentatively decided that the proposed examples should include (1) restrictions on raising revenue and (2) expense restrictions.

Minutes of Videoconference Meetings, October 2022, 2020

The Board discussed potential approaches and limitations to the disclosure of risks and uncertainties. No tentative Board decisions were made.

Minutes of Videoconference Meetings, September 810, 2020

The Board began deliberations by discussing the user outreach and literary research conducted related to risks and uncertainties disclosures. Board members provided general observations and additional considerations for the project moving forward, including certain limitations that would apply to these disclosures. 

The Board continued by discussing whether to require a disclosure addressing the general nature of operations of a government. The Board tentatively decided that a disclosure that addresses the general nature of operations of a government should not be proposed to be required.

The Board then discussed whether to require a disclosure that broadly describes the use of estimates in the preparation of governmental financial statements. The Board tentatively decided that a disclosure that broadly acknowledges the use of estimates in the preparation of governmental financial statements should not be proposed to be required.

Lastly, the Board discussed two alternatives of a note disclosure related to certain significant estimates. The Board tentatively decided to propose alternative two, which was a broader approach in the description of the category. Additionally, the Board tentatively decided that the note disclosure requirement proposals related to the use of significant estimates should include specific qualifications or limitations.

Minutes of Videoconference Meeting, July 6, 2020
 
The Board considered a project prospectus related to a proposed project on Risks and Uncertainties Disclosures. The Board discussed issues related to the project scope and agreed to add the project to its current technical agenda. The Board also agreed that the issues identified within the prospectus should be addressed by the project.
 

Risks and Uncertainties Disclosures—Tentative Board Decisions to Date


 The Board tentatively decided the following:
  • A disclosure that addresses the general nature of the operations of a government should not be proposed to be required.
  • A disclosure that broadly acknowledges the use of estimates in the preparation of governmental financial statements should not be proposed to be required.
  • A broad-based note disclosure related to significant uses of estimates should be further developed based on decisions about qualifications or limitations on risks and uncertainties note disclosures.
  • The scope of the project should be limited to certain categories of risks and uncertainties disclosures.
  • Note disclosures related to the category of a government’s current vulnerabilities due to certain concentrations should be included in the scope of the project.
  • Note disclosures related to the category of the government environment should be included in the scope of the project.
  • Note disclosures related to current vulnerabilities due to certain concentrations and the government environment should be developed within the described categories accompanied by examples.
  • For the categories of current vulnerabilities due to certain concentrations and the government environment, disclosures should be required when the government determines that it is reasonably possible that an event associated with the risk or uncertainty will occur within 12 months of the financial statement date or shortly thereafter (3 months) and that event will have a substantial impact within 2 to 3 years of the date of the financial statement.
  • Note disclosures for current vulnerabilities due to certain concentrations and the government environment should be presented for the primary government, including its blended component units, unless the risk profile is substantially different for a reporting unit(s) and, therefore, should be disclosed for that reporting unit(s).
  • Examples developed for the guidance on note disclosures for current vulnerabilities due to certain concentrations should include (1) principal employers; (2) principal industries; (3) principal resource providers; (4) composition of principal resources; (5) labor (such as collective bargaining arrangements or percent of unionized workforce); and (6) external suppliers of material, labor, or services (for example, incarceration facilities with third-party staffing).
  • Examples developed for the guidance on note disclosures related to the government environment should include (1) restrictions on raising revenue, (2) expense restrictions (such as debt covenants), (3) inflexibility in reducing expenses (such as unfunded mandates), and (4) limits on incurrence of debt that are externally imposed.
  • The objectives of note disclosures for the categories of current vulnerabilities due to certain concentrations and the government environment are to provide essential information to users of governmental financial reports about risks and uncertainties faced by those governments that may impact the government’s ability to continue to provide services and meet its obligations as they come due.
For the categories of current vulnerabilities due to concentrations and the government environment, substantial impact should be described as one that affects the government’s ability to (1) continue to provide services at the level of the current reporting period or (2) meet its obligations as they come due. Outreach will be conducted to receive additional user feedback on the proposals.  This outreach will include soliciting feedback on the potential for adding a risks and uncertainties disclosure category that addresses significant estimates. The following tentative Board decisions related to this outreach include:
  • Specifically, for the uncertainty approach to the potential category of significant estimates:
    • The category should be described as an uncertainty based on certain inputs for estimated amounts recognized in the financial statements or disclosed in the notes to financial statements.
    • A disclosure for such an uncertainty should be made if information becomes known by the management of the government about inputs to the estimate (that is, an actual event or condition has occurred that will change the inputs) before the financial statements are issued and, based on that information, it is more likely than not that the change in estimate as reflected in the relevant assets, liabilities, inflows, outflows, or other disclosures will change within 12 months of the financial statement date or shortly thereafter (for example, within an additional 3 months) and that the effect of the change in estimate would be significant. 
    • Note disclosures should provide essential information to users of government financial reports about an elevated level of variability in a particular recognized or disclosed estimated amount.
  • Specifically, for the risk approach to the potential category of significant estimates:
    • The category should be described as a risk to a government based on certain inputs for estimated amounts recognized in the financial statements or disclosed in the notes to financial statements.
    • A disclosure for such a risk should be made if information becomes known by the management of the government about inputs to the estimate (that is, an actual event or condition has occurred that will change the inputs) before the financial statements are issued and, based on that information, it is reasonably possible that the estimate will change within 12 months of the financial statement date or shortly thereafter (for example, within an additional 3 months) and the change will have a substantial impact within 2 to 3 years from the date of the financial statements. A substantial impact is described as one that affects the government’s ability to (1) continue to provide services at the level of the current reporting period or (2) meet its obligations as they come due.
    • Note disclosures should provide essential information to users of government financial reports about risks faced by those governments that may impact the government’s ability to continue to provide services or meet its obligations as they come due. 
  • Examples developed for the guidance on note disclosures for the uncertainty and risk approach related to the potential category of significant estimates should include (1) cost of municipal landfill closure and postclosure care,
    (2) uncollectible amount of accounts receivable, (3) loss contingency associated with a lawsuit, (4) contingent liability associated with an obligation of another entity, and (5) asset retirement obligation associated with contamination.
  • The disclosure applying either the uncertainty approach or the risk approach to the potential category of significant estimates would be at the level of the primary government, unless the effect of the uncertainty or risk is substantially different for a reporting unit(s) and, therefore, should be disclosed at the reporting unit level.